Cold Comfort

In this issue:

When things have gone as wrong for as long as they have for the oil industry, it’s tempting to seek out explanations beyond the obvious.

First the crude glut was all supposed to be a Saudi plot, motivated by (take your pick) the imperative to derail U.S. shale, the bitter rivalry with Iran or, perhaps, the desire to punish Russia for its actions in Syria.

All of which ignored the fact that the Saudis had little choice but to defend market share in a world where any restraint of their output could be instantly offset with additional sales by their competitors in the U.S., Iraq and elsewhere.

Then worry turned to China’s sputtering growth and its effect on energy demand across emerging markets. Although the global financial crisis caused barely a hiccup in that demand, the next global recession might depress it more thoroughly, it is widely feared.

The only problem with that theory is that there’s been very little actual evidence of a slowdown in global demand based on data from a variety of sources. China’s auto sales were up 8% year-over-year last month, and they were paced by SUVs. India’s car sales rose 10% last year.

More electric cars will be sold too, of course. But they’re being adopted at a pace that, even in the most fanciful scenario, will not challenge oil’s dominance in transportation any time over the next decade or two.   

So we’re back to the most obvious explanation for the crude glut: oversupply caused by rapid advances in extraction technology. And the bullish news here, as our lead story reports, is that the drastic capital spending cuts in the U.S. oil patch and elsewhere will clamp down hard on the supply of surplus crude in short order.

In contrast with crude, propane’s main problem has been weak demand, tied to near-record warmth across the Northeast and Midwest this fall and winter. But the low wholesale prices pegged of crude have been a godsend to distributors who’ve offset some of their lost revenue with fatter margins.

This demonstration of resilience has recently impressed even the shellshocked MLP investors, who’ve made one of our Best Buys, AmeriGas Partners (NYSE: APU), one of the sector’s top performers this year. Our sector spotlight explains why we remain bullish on AmeriGas and hope to add one of its rivals to the portfolio in the near future.

Weather anomalies come and go, and so do dramatic changes in commodity supply and demand doomed by the resulting swings in prices. The only certainty is that extrapolating the medium-term future based on the recent trend is a sure way to lose money in this business.

We’re focusing on the inflection points that should signal a change in the trend in the not-too-distant future,   


Commodity Update

Oil prices have made a strong move up since our previous issue. West Texas Intermediate (WTI) rose $5.17/bbl (17.6%) to $34.61/bbl. Brent crude added 10.7% to $36.94/bbl. Over the past month, oil prices have now risen by about 30% from the lows set in January. No such reprieve for natural gas, however. Since our previous issue the Henry Hub benchmark has dropped another 26 cents to $1.71/MMBtu.  


In Other News

  • Last week Bloomberg argued that “superior electric cars are on their way, and they could begin to wreck oil markets within a decade.” (I will address this in this week’s article).
  • Major Marcellus gas producer Cabot Oil and Gas (NYSE: COG) announced a public offering of 44,000,000 shares of its common stock
  • Bill Gates predicted that researchers will “discover a clean energy breakthrough that will save our planet and power our world” within the next 15 years
  • Saudi Arabia’s oil minister said the kingdom is prepared to let oil prices slip to $20 a barrel to force “inefficient, uneconomic producers” out of the market
  • Continental Resources (NYSE: CLL) and Whiting Petroleum (NYSE: WLL) have both announced that they will halt fracking in the Bakken Formation.


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